Government moves towards removing subsidies | Restrictions that prevented more adjustments from being implemented in the middle and low sectors were removed

The government will proceed with the reduction of subsidies on natural gas and electricity for middle and low-income groups from June. Through Decree 465/2024, published in the Official Gazette this Tuesday, the annual increase limit equal to 40 percent of the wage variation coefficient of the previous year was canceled for low-income users (tier 2) and 60 percent for middle-income users (tier 3). Without this limit, which was set by the Alberto Fernández government when introducing the segmentation system, Economy Minister Luis Caputo will be able to proceed with the removal of subsidies for 65 percent of the population concentrated in those two tiers. It has already suffered an increase due to the adjustment of the distribution margin, but the wholesale price of energy remains stable.

The government raised the seasonal price of electricity to 44,401 pesos per megawatt for non-subsidized users (Level 1). This value was also applied to large distributor users (GUDI), public organizations and N3 households that receive subsidies above 400 kWh/month and 650 MWh/month for the eleven provinces of the NOA and NEA. However, it was frozen at 2,981 pesos for Level 2 users and 3,756 pesos for Level 3. This figure represents less than 5 percent of the real cost of energy.

At the time they did not adjust these prices because the initial intention was to proceed with a comprehensive reform of the apportionment system. However, that reform got stuck and now they decided to remove by decree the ceiling that limits the increase for N2 and N3 users, so they start cutting subsidies on that group and the adjustment does not fall only on N1.

A comprehensive reform of the division system, which contemplated the implementation of a basic energy basket, was not ruled out, but postponed until later. Indeed, Article 1 of the decree states that they are going to restructure the energy subsidy regime, but not now. To move in that direction, a transition period is opening that will run from June 1 to November 30, which is likely to be extended for another six months later.

In the rationale of the official document, it was stated that “the generalized subsidy regime does not distinguish between residential and commercial users, and benefits those who do not need such support, to the detriment of the most vulnerable people, in addition to promoting inefficient consumption and wastage. The use of natural and economic resources of the National State, with monetary issue”.

While “on the other hand, targeted subsidies seek to guarantee access to essential consumption only to those households that really need and require it, while encouraging efficient consumption, to the extent that excesses of essential consumption must be paid at full cost, all of which also results in the efficiency of public expenditure.

For this reason, the Executive considered that “it is convenient to begin the transition towards a targeted subsidy scheme, which is representative of a model based on the economic-financial self-sufficiency of the energy sector, gas and oil exports, free interaction between supply and demand, and a framework of incentives for private investments in infrastructure”.

Now, while they resolve how to implement this focused system, they will go ahead with cutting subsidies on the current split system. To achieve this, it is planned not only to increase the wholesale price of energy, but also to limit the subsidized consumption of N2 users and eventually reduce the subsidized limit currently present in N3 households, which is 400 kW.

Article 5 of the decree gives the Ministry of Energy the authority to “establish limits on the volume of subsidized consumption in all residential categories and segments, both for electricity and gas.” It then clarifies that “to establish the maximum subsidizable volume, the enforcement authority must consider the necessary consumption criteria, for which it may consider the bioenvironmental zone in which consumption is located and the time of year.” In addition, it indicates that “in a first step, the enforcement authority may extend to level 2 users the consumption limits that already apply to level 3 users pursuant to resolution no. 649 of September 13, 2022 and 686 of October 5, 2022.”

Finally, it enables periodic review of the maximum consumption quantities for subsidy, as well as of the amount or percentage of discount on the energy component, taking into account the progressive acquisition of efficient consumption habits by users.